DBRS Limited (DBRS Morningstar) confirmed all ratings on Power Corporation of Canada (POW or the Company) and Power Financial Corporation (PWF), including POW’s Issuer Rating at “A” and PWF’s Issuer Rating at A (high). The trends on all ratings are Stable.
KEY RATING CONSIDERATIONS
The ratings confirmations reflect POW’s and PWF’s excellent franchise in life insurance and asset management across several key markets in Canada, Europe, the United States and China, and their conservative risk profile and resilient earnings amid the Coronavirus Disease (COVID-19) pandemic. Both holding companies benefit from healthy levels of liquidity, relatively low leverage levels, and steady dividend flows from their operating companies. The notching differential between POW and PWF reflects the structural subordination of POW’s debt to PWF’s. POW’s and PWF’s Stable trends correspond to the Stable trends of their main operating company, Great-West Lifeco Inc. (GWO; rated A (high) with a Stable trend by DBRS Morningstar).
The ratings of POW and PWF reflect those of their main operating company, GWO. An upgrade of GWO’s ratings would likely result in an upgrade for both POW and PWF.
Conversely, a downgrade of GWO’s ratings would result in a downgrade of POW’s and PWF’s ratings. Additionally, a sizable shift in the risk profile resulting from a major divestiture or acquisition, a material increase in unconsolidated financial leverage, or evidence of deterioration in governance controls would also result in a ratings downgrade.
DBRS Morningstar’s rating assessment of POW is largely derived from the Company’s 100% equity interest in PWF, which, in turn, has controlling interests in GWO and IGM Financial Inc. (IGM; rated A (high) with a Stable trend by DBRS Morningstar), two of Canada’s largest financial institutions in the insurance and asset management industries, respectively. Additionally, PWF has significant holdings in a portfolio of global companies based in Europe through its investment in Groupe Bruxelles Lambert S.A. GWO is the greatest contributor to the earnings and overall strength of PWF and, consequently, of POW. Despite the high degree of operational integration between PWF and POW following the corporate reorganization that was completed in February 2020, DBRS Morningstar deems POW’s debt to be structurally subordinated to PWF’s in a liquidation scenario, which explains the one-notch differential between holding companies. Moreover, both POW and PWF have debt outstanding and both still have the ability to issue additional debt preventing the application of a “Consolidated Credit Approach” as per DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships. If PWF stopped issuing debt and outstanding debt became immaterial, then the “Consolidated Credit Approach” would be warranted, resulting in the ratings being equalized at A (high).
POW’s key asset is its 100% equity interest in PWF. Aside from PWF, other interests include Sagard (a multistrategy alternative asset manager with a presence in North America and Europe); Power Sustainable (a global multiplatform alternative asset manager with investments in sustainable strategies); a minority ownership in China AMC (a leading Chinese asset management company); and other investments.
DBRS Morningstar views POW and PWF as benefitting from a strong financial position and prudent decision making supported by healthy levels of liquidity and steady dividend flows from their operating companies. At nearly 14%, POW’s return on equity for the nine months ended September 30, 2021 (9M 2021), proved exceptionally resilient during the pandemic. Although the strength of earnings is mostly coming from GWO and IGM, DBRS Morningstar notes that investment income had a larger than typical contribution to operating earnings in 9M 2021. The Company’s interest payments on its senior debt and dividend obligations on its perpetual preferred shares are exceptionally well covered (40.3 times as at 9M 2021). The Company’s liquidity was strong, with $1,575 million in cash and short-term investments as at September 30, 2021, on a combined basis for POW and PWF.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021; https://www.dbrsmorningstar.com/research/386615). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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